Project Background:

A. T. Kearney Ltd., a US based international management consultancy firm was commissioned in 2001 by the Planters’ Association of Ceylon to develop a medium term strategy for the Sri Lankan tea industry. Since May 2001, the A. T. Kearney team has been working closely with all the key stakeholders in the industry in Sri Lanka to develop a strategy that would position Sri Lanka tea in the most advantageous position in the international market.

As part of this assignment, the scope of work included the following:

• Analysis of the global consumer market for tea and other beverages to identify markets and consumer segments that offer the best potential (revenues, growth, profitability) for Sri Lanka tea

• Branding, sales and marketing strategies to succeed in these markets

• Given the strategy, structural and regulatory changes required within the industry to improve competitiveness of Sri Lanka tea

• Recommendations on optimum roles and responsibilities of supporting institutions

The strategy and implementation plan have now been agreed upon and the A. T. Kearney team is now working to start the process of implementation. A newly formed Steering Committee which comprises all the industry stakeholders has been set up to champion and drive forward the strategy.

Issues and challenges facing the Sri Lankan tea industry

Sri Lanka is a major player in the global tea industry accounting for 10% of tea production and 20% of tea exports. Sri Lanka tea is known for its strengths - unique variety, flavour, diversity and a residual image for quality. The industry however faces several critical challenges, which are likely to affect its viability in the near term:

The analysis of the global beverage market shows that tea is still the world’s largest consumed beverage by volume but is losing ground to other beverages, particularly soft drinks. Certain segments of the market for tea however, are showing significant growth, viz., tea bags, ready to drink teas and herbal teas.

The current oversupply in the global tea industry is likely to increase over the next five years due to the consistent yield improvement programmes being undertaken by key producing countries and entry of new low cost players such as Vietnam and Malawi. Global export availability is projected to increase by 2.3% p.a. (2000 - 05) while import demand is projected to increase by 1.3% p.a. in the same period.

In the last few years, CTC teas are growing at a faster rate than Orthodox teas, fuelled largely by cost considerations and the move to tea bags in the developed markets.

Prices in the commodity market have been stagnant in real terms in the last twenty years. The dependence of Sri Lanka on the commodity markets and the relatively low level of value addition also affects industry profitability. Commodity market prices have increased in real terms by only 0.8% between 1980-99. However, retail prices have been increasing in the past few years by approximately 3%.

Nearly half of Sri Lankan teas are exported to potentially ‘high risk’ markets such as CIS, Saudi Arabia, UAE, Iran and Iraq. These markets are vulnerable either because their economy is relatively unstable or because they are rapidly moving away from Sri Lankan teas to CTC due to the increasing pressure from Multi National Companies (MNCs).

The cost structure in Sri Lanka is significantly higher than many of the new competitors thereby affecting overall industry competitiveness.

The producing and exporting segment where Sri Lanka is strong gets a lower proportion of the global value chain than the marketing and brand owning segment (26% vs 36%).

The cumulative effect of these trends on industry revenues, costs and profitability indicates that certain sectors of the industry will become unprofitable in the next five years if no immediate steps are taken to reverse the effect.

Key imperatives

The industry in Sri Lanka faces three key imperatives:

• A need to improve viability by increasing price realisations for its tea.

• A need to move away from the commodity market, characterized by oversupply and stagnant prices, by moving up the value chain

• A need to differentiate Sri Lanka tea from low cost producers amongst consumers and buyers.

Recommendations

To maintain leadership in the global tea export market and aggressively increase share of the value chain.

Business Objective: To enhance the contribution of the Sri Lankan tea industry to the national economy and improve profitability of the key stakeholder groups.

Positioning: To position Sri Lanka as "The Best in Class" source of quality teas leveraging the core strengths of Sri Lanka teas - flavour, aroma, variety and brand image.

To achieve the above objectives, we recommend a two pronged approach:

Value addition through branding and marketing through the formation of a joint marketing company

In order to move up the value chain, the most practical solution is for key players in the Sri Lankan tea industry to pool resources and expertise to form a joint marketing company on a voluntary basis.

The rationale is as follows:

Brand owners have the largest share of revenues and profitability in the global value chain (which is estimated to be worth $24 billion at retail selling prices).

Moving up the value chain will help the industry reduce its dependence on commodity markets and get greater benefit of higher prices and stability at the retail consumer end

The financial analysis of the cost of brand launch in key consuming countries shows it would be extremely difficult for any one company in Sri Lanka to mobilize necessary resources to establish a leading brand in these countries.

Detailed projections developed with alternative investment and country selection scenarios for the joint marketing company. The marketing company by the end of Year 5 would have the potential to account for 7% of Sri Lankan tea exports and become one of the top 5 tea brands in each country of operation.

Based on an analysis of 23 key exporting countries for Sri Lankan teas, ten high potential markets for launch of mass market brands and/or private label operations were identified and detailed market entry plans have been developed for these countries.

Launch initiatives to become a preferred buyer destination in the global tea trade

In order to defend and improve the Sri Lankan share of the export market for tea in the face of over supply and increasing competition, A. T. Kearney has recommended that the industry launch a number of initiatives to improve process efficiencies and thereby secure a more stable market for its teas in the future.

The rationale for this strategy is as follows:

In the next 5 years, over 80% of Sri Lankan tea will be exported in bulk or low value addition form to foreign owned brands.

Interviews with key buyers suggest that there are a number of parameters which make Sri Lanka a relatively buyer unfriendly destination vis-a-vis other producing countries. Parameters include inconsistent quality from the same factory, smaller lot sizes of Sri Lanka (20-40 pkgs) compared to other producing countries like India and Kenya, lack of long term contracts with buyers and the use of chests instead of paper sacks in many factories.

Given the cost structure of the industry, it is critical that the industry provide other facilitating mechanisms apart from price to encourage trade.

To enable industry transformation, we recommend that all industry associations collectively form an industry federation as an apex body to champion the implementation of the strategy and represent the industry in policy formulation.

The ultimate vision for the

federation is as follows:

The federation will act as a pan industry body and implement the strategy.

Address common issues and concerns of stakeholders either acting on its own or with other supporting institutions.

Act as a common voice of the industry to the government and provide inputs of policies relating to the tea industry.

Promote Ceylon tea to trade and consumers in key countries.

The federation will also coordinate the activities of various supporting institutions like the Tea Board and Tea Research Institute by the overall strategy through overlapping governance structures and by ensuring that the annual plans of these institutions are subject to approval by the governing board of the federation.

In studying many examples of successful strategies which had transformed national industries in other countries, a critical success factor was the formation of an apex body such as this federation which would have the responsibility to implement the strategy and build consensus and cooperation across the industry stakeholders.

(Plantation world)